Pension reforms in the U.K. and U.S. are likely to result in greater demand for highly rated paper at the long end of the curve and could encourage governments to issue more long-rated debt. Industry professionals point to France's recent inaugural 50-year bond issue, which was met with roaring demand, as Exhibit A. The transaction may prompt other sovereigns to issue similar long-dated paper, said Stephane Fertat, director at Fischer Francis Trees & Watts, who noted the Agency France Trésor's benchmark sale whet the appetite of pension funds.
Technicals bode well for new sales because the imbalance between supply and demand at the long end of the curve will continue as regulators force pension funds to put money to work in the 10- to 30-year part of the curve, said Paul Abberley, global head of fixed income at ABN AMRO Asset Management. He expects the demand to cause the long end of government and credit curves to outperform this year, which is counterintuitive given the rising rate environment.
"One of the biggest complaints about last year was the decoupling between macro factors," said Robert Kyprianou, head of securities investment management at AXA Investment Managers, noting the surprising outperformance at the back of the curve.
He said U.K. fixed-income investors are viewing the asset class more as a long-term investment than as a cash alternative, as they had previously, and predicted this will be another factor to boost demand for longer-dated paper.
